Benefits Monthly Minute

It's Final: Pecuniary Considerations Must Steer Fiduciary Investment Decisions | Shedding Light on the New Health Plan Transparency Rule | Taking the Sting Out of COBRA

It’s Final: Pecuniary Considerations Must Steer Fiduciary Investment Decisions

As reported in the July 2020 Monthly Minute, the DOL previously released a proposed rule seeking to clarify its position that ERISA plan fiduciaries may not invest in environmental, social and governance (ESG) vehicles when an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-financial objectives. On October 30, 2020, the DOL largely adopted the proposed rule and released a Final Rule amending certain provisions of the “investment duties” regulation at 29 CFR 2550.404a-1. The amendments codify fiduciary standards for selecting and monitoring investments, and provide regulatory guidance for benefit plan fiduciaries addressing trends involving ESG investing.

Guidance in this area has evolved over the years, beginning with Interpretive Bulletin 94-1, which focused on “economically targeted investments” (ETIs) and indicated that an ETI investment is not necessarily incompatible with ERISA’s fiduciary obligations as long as the investment has an expected rate of return that is commensurate to rates of return of alternative investments with similar risk characteristics that are available to the plan, and the investment is otherwise appropriate. In 2008, this guidance was superseded by Interpretive Bulletin 2008-01, and in 2015, it was again replaced by Interpretive Bulletin 2015-01. Each subsequent Interpretive Bulletin emphasized financial returns and cautioned fiduciaries against accepting expected reduced returns or greater risks to secure social, environmental, or other public policy goals. Among other things, the June 2020 proposed rule essentially codified the DOL’s position that ERISA requires plan fiduciaries to select investments based on financial considerations, provided that ERISA’s exclusive-purpose rule prohibits fiduciaries from subordinating the interests of plan participants and beneficiaries in retirement income and financial benefits to non-pecuniary goals, and provided guidance on selecting designated investment alternatives which reiterated that ERISA’s prudence and loyalty standards apply to the selection of investment alternatives and described requirements for selecting investment alternatives purporting to pursue ESG objectives.

Overall, the Final Rule generally adopts the proposed regulation with certain modifications, prevents fiduciaries from selecting investments based on non-pecuniary considerations, and requires them to base investment decisions on financial factors. Certain changes made by the Final Rule to the investment duties regulation are highlighted below:

  • The Final Rule addresses the duties of prudence and loyalty as separate and distinct in their application to investment duties. And, while the regulation continues to operate as a “safe harbor” with respect to the duty of prudence’s application to investment decisions, the new provisions addressing the duty of loyalty in connection with these decisions present only minimum requirements.
  • The Final Rule adds a specific provision confirming that ERISA fiduciaries must evaluate investments and investment courses of action based solely on pecuniary factors, meaning factors that the fiduciary prudently determines are expected to  materially affect investment risk and/or return based on appropriate investment horizons consistent with the plan’s investment objectives and the funding policy. This provision also states that the duty of loyalty prohibits fiduciaries from subordinating the interests of participants to unrelated objectives and prohibits them from sacrificing investment return or taking on additional risk to promote non-pecuniary goals.
  • The Final Rule requires fiduciaries to consider "reasonably available alternatives with similar risks" to meet their prudence duties under ERISA and clarifies that fiduciaries need not “scour the market” for every possible comparable investment alternative.
  • The Final Rule removes ESG terminology which appears in the proposed rule given it lacks a precise and generally accepted meaning and may misdirect fiduciaries’ analysis of whether ESG factors are appropriate considerations given the relevant question is whether a factor is pecuniary.
  • The Final Rule sets forth required investment analysis and documentation requirements for those limited circumstances when fiduciaries may use non-pecuniary factors to choose between or among investments that cannot be distinguished based solely on pecuniary factors. The documentation requirements are meant to prevent fiduciaries making investment decisions based on non-pecuniary benefits without first engaging in careful analysis and evaluation.
  • The Final Rule states that ERISA’s prudence and loyalty standards apply to a fiduciary’s selection of a designated investment alternative. However, if the plan allows participants and beneficiaries to choose from a broad range of investment alternatives, then the rule does not categorically prohibit the fiduciaries from considering or including, as designated investment alternatives, investment funds, products, or model portfolios that support non-pecuniary goals.  Notwithstanding, the overarching requirement to evaluate investments solely based on pecuniary factors must still be satisfied.
  • The Final Rule prohibits plans from adding or retaining any investment fund, product, or model portfolio as a QDIA or as a component of such a default investment alternative, if its objectives or goals or its principal investment strategies include, consider, or indicate the use of one or more non-pecuniary factors.

The Final Rule generally takes effect 60 days after publication. However, plans will have until April 30, 2022, to make corresponding changes to QDIAs, and the DOL will not attempt to enforce the rule with respect to any investment action or decision taken prior to the rule’s effective date.

KMK Comment: This Final Rule clearly states that fiduciaries must choose investment options based on financial considerations and not on social or political considerations.  Although generally there is not a requirement to change any current investment selections that may have been selected on the basis of the previous proposed guidance, there is a notable exception to that general rule for QDIAs.  Fiduciaries will want to work closely with their investment advisors to be in compliance with this Final Rule.

Shedding Light on the New Health Plan Transparency Rule

The Transparency in Coverage Final Rule released this month by the DOL, HHS and IRS (the Departments) requires most self-insured and insured group health plans and insurers to make extensive price and cost-sharing disclosures to participants and beneficiaries, and in some cases, the public. The rules generally include two approaches geared towards making health care price information more accessible. Under these approaches, each non-grandfathered group health plan or health insurance issuer offering non-grandfathered health insurance coverage in the individual and group markets would be required to --

  1. Make available to enrolled participants and beneficiaries personalized out-of-pocket cost-sharing information for all covered health care items and services through an internet-based self-service tool on a website made available by the plan or issuer (or in paper form, upon request), which addresses the following:
    1. Accumulated amounts
    2. In-network rate, comprised of the negotiated rate for an in-network provider, and the underlying fee schedule rate
    3. Out-of-network allowed amount (or more accurate rate)
    4. If a participant or beneficiary requests information for an item or service subject to a bundled payment arrangement, a list of the items and services for which cost-sharing information is being disclosed
    5. If applicable, notification that coverage of a specific item or service is subject to a prerequisite, and
    6. A notice that includes the following information in plain language:
      1. A statement that out-of-network providers may balance bill and that the cost-sharing information does not account for these potential additional amounts
      2. A statement that the actual charges for a covered item or service may be different from the provided estimate of cost-sharing liability depending on the actual items or services received at the point of care
      3. A statement that the estimate of cost-sharing liability for a covered item or service is not a guarantee that benefits will be provided for that item or service
      4. A statement disclosing whether the plan counts copayment assistance and other third-party payments in the calculation of the deductible and out-of-pocket maximum
      5. For preventive services, a statement that an in-network item or service may not be subject to cost-sharing if billed as preventive if the plan cannot determine whether the request is for a preventive or nonpreventive item or service, and
      6. Any additional (non-conflicting) information, including other disclaimers.
        1. Note: the Final Rules require plans and issuers to include in the internet-based self-service tool (and by request, through the paper method) 500 items and services identified by the Departments for plan years beginning on or after January 1, 2023, and all items and services for plan years beginning on or after January 1, 2024.
  2. Effective for plan years beginning on or after January 1, 2022, make available to the public on an internet website in-network negotiated rates with network providers and historical payments of allowed amounts to out-of-network providers through three standardized, regularly updated machine-readable files, as follows:
    1. In-network rate machine readable file to include: name and HIOS identifier (or EIN); billing code and a plain language description for each billing code; and, all applicable rates (negotiated rates, underlying fee schedule rates, or derived amounts).
    2. Out-of-network allowed amount machine readable file to include: name and HIOS identifier (or EIN); billing code and a plain language description for each billing code; and, unique out-of-network allowed amounts and billed charges with respect to covered items or services furnished by out-of-network providers during the 90-day time period that begins 180 days prior to the publication date of the machine-readable file.
    3. Prescription drug machine-readable file to include: name and HIOS identifier (or EIN); the National Drug Code (NDC) and proprietary and nonproprietary name assigned to the NDC by the FDA for each covered prescription drug; the negotiated rates; and, the historical net prices.

KMK Comment: with these new transparency rules, consumers will have access to volumes of cost-sharing liability estimates which will likely impact price comparison and consumerism. However, the burden of delivering this information windfall to consumers falls squarely on plans and insurers which face significant work to implement these new disclosure requirements. While insured plans may rely on the insurer for compliance provided that this obligation is memorialized in writing, self-insured plan sponsors are ultimately responsible for their own compliance even if the plan’s TPA may be contractually responsible for handling disclosures. Plan sponsors who are fully insured will want to begin working with their insurer to update the service agreement to address this.  Plan sponsors who are self-insured will also need to work closely with the TPA to make sure this obligation will be met.  

Taking the Sting Out of COBRA

As reported in the October 2019 Monthly Minute, over the past year or so, we have seen a string of COBRA class actions seeking monetary penalties on account of defective COBRA notices. Recently, in Carter v. Southwest Airlines Co., the DOL filed an amicus brief challenging the plaintiff’s theory of liability. In that case, Plaintiff Carter alleged that, when she lost her job at Southwest Airlines, she received a COBRA election notice that failed the regulation’s requirements, in part because the notice did not contain any contact information for Southwest as the plan administrator. As a result, the parties dispute whether COBRA regulations require a COBRA election notice to list contact information for the “plan administrator” even if that notice contains contact information for some other party responsible under the plan for administration of continuation coverage. The DOL’s amicus brief acknowledges that while COBRA may require an ERISA-covered group health plan to offer a continuation of coverage, administering COBRA may or may not be a task done by the “plan administrator.” By parsing out the regulatory and preamble language, positing that the Florida district court in Bryant v. Wal-Mart Stores, Inc., erred in concluding that a COBRA election notice always requires contact information for plan administrators, and noting that, in practice, most group health plans employ a specialized COBRA administrator, in addition to a plan administrator, the DOL ultimately concluded that its COBRA regulations do not require COBRA election notices to include the contact information for plan administrators where a different entity administers the plan’s continuation coverage under COBRA.  Unfortunately, plaintiffs’ lawyers appear undeterred by the DOL’s well-reasoned amicus brief, and on November 20, 2020, Wal-Mart again found itself embroiled in a proposed class action (Champendo v. Wal-Mart Stores, Inc.) alleging defective COBRA notices in Florida district court.  In this latest Wal-Mart case, plaintiff takes issue with the failure to include the name and contact information of the plan administrator in the Wal-Mart COBRA notices and alleges that this failure prevented discharged employees from making informed COBRA elections. While the Champendo v. Wal-Mart plaintiffs may have an uphill battle considering the DOL has made its position clear, the Bryant v. Wal-Mart Stores, Inc. decision still stands so it remains unclear what direction this latest filing will take.

KMK Comment: the DOL’s stated position appears consistent with the goals of ERISA which seek to provide plan participants with useful information that is relevant to their eligibility for and entitlement to benefits. Where COBRA coverage is involved, the COBRA administrator’s contact information (which may or may not be the same as the plan administrator), will be a key source of information and should be disclosed in the COBRA election notice, although including the plan administrator’s contact information in addition would also be advisable especially in light of the ongoing COBRA litigation. Now is a good time for plans to review COBRA communications considering the uptick in COBRA litigation and recent updates to the DOL model COBRA notices.

The KMK Law Employee Benefits & Executive Compensation Group is available to assist with these and other issues.

Lisa Wintersheimer Michel

John F. Meisenhelder

Antoinette L. Schindel

Kelly E. MacDonald

KMK Employee Benefits and Executive Compensation email updates are intended to bring attention to benefits and executive compensation issues and developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.

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